Euro Index Enters Reversal Zone

05/21/04 10:10:09 AM

by Arthur Hill

Despite a decline over the last few months, the Euro Index ($XEU) remains in a long-term uptrend and is trading in a potential reversal zone.

Security: $XEU
Position: Hold

The index entered a support zone similar to one that foreshadowed an important low in Aug-03 (107.71). After an advance from 96.13 to 119.28, the index retraced 50% with a falling price channel (magenta trendlines). Also notice that the prior consolidation (gray oval) acted as support. In fact, the index pretty much bottomed in the middle of the prior consolidation with the trendline breakout around 122 as the catalyst.

Figure 1: Weekly chart of the Euro.

Graphic provided by: MetaStock.

The chart set-up looks remarkably similar to Aug-02. First, the index retraced 50% of the prior advance (107.71 to 129.07) with a decline back to around 118. Second, there is a support zone between 119.28 and 115 marked by broken resistance (119.28) and the October reversal (around 115). In addition, the trendline extending up from Mar-02 marks support around 118.

Figure 2: Daily chart of the Euro Index.

Support is one thing and an actual reversal is another. As noted on the daily chart, the medium-term trend is clearly down. The pattern over the last few months looks like a falling wedge with two lows around 118 over the last few weeks. The intermittent high at 122 makes a double bottom possible and it would take a move above this level to signal a continuation higher. RSI is hinting at a potential reversal with a bullish divergence (green line) brewing. Further strength above 50 could be used to confirm any strength in the Euro.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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REVERSAL

Euro Index Enters Reversal Zone

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